Idea of sovereign wealth fund now appears more appealing

The new government's argument for a sovereign wealth fund is making more sense as US debt quality is deteriorating, but public and private debts could spiral out of control, as in the euro zone.

"The US debt downgrade may make the idea to create a sovereign wealth fund much more appealing," Praipol Koomsup, an economist at Thammasat University, said yesterday.The new government floated the notion of establishing a sovereign wealth fund to make use of part of its US$180-billion (Bt5.37 trillion) international reserves.Praipol said the fund might be financed by 10-20 per cent of international reserves. "In my opinion, international reserves worth $180 billion may be excessive and unnecessary," said Praipol, a member of the Bank of Thailand's Monetary Policy Committee. The central bank is restricted by law from investing too much of its international reserves for higher returns. Most of the reserves are parked in government bonds, particularly US Treasuries, previously considered by the market as risk-free. Government bonds usually have lower yields than equities or other assets. "The investment objective of the fund should be to promote the country's competitiveness, not to speculate on commodities like gold," he said. Gold is not a good bet because central banks and the International Monetary Fund want to play down the role of the metal in global finance, he said. The IMF recently sold its gold inventory. However, management of the fund could be a problem, as it may not be able to win the public's trust. Songpol Chevapanya, vice president of Kasikornbank, said Asian governments such as China and Thailand would have a good chance to raise funds via bond issuance, as demand for Asian bonds is likely to increase. The economic slowdown in the United States will not affect the Thai economy much because of its strong fundamentals and exports, Songpol said. Chakkrit Parapuntakul, director-general of the Public Debt Management Office, said government bond yields had dropped. The 10-year bond shed about 20 basis points yesterday afternoon as investors entered the market after the further drop of stock markets. Rating agency Standard and Poor's should have cut the United States' top "AAA" rating to a much lower level than "AA+", as the US government is sagging under a huge debt load, he said. But at least it took the first step. "If the two rating agencies Moody Investors' Service and Fitch Ratings uphold the same professional standard as S&P does, they should follow suit," he said. Teerana Bhongmakapat, dean of economics at Chulalongkorn University, said public and private debt in Asia is not low compared with euro-zone and US debts. For example, Thailand's public debt is 41 per cent of gross domestic product, which is a cause for concern. Asian countries also have flawed policies in common, as their central banks have kept interest rates too low for too long and still subsidise exports by keeping their currencies down against the US dollar. "These factors encourage the private sector to accumulate more debt. Slower economic growth threatened by the possibility of a global slowdown would lead to both public and private debt ballooning in Asia too," he warned. After Greece, Ireland and Portugal were bailed out, the market now fears that Italy and Spain, the third- and fourth-largest economies in Europe, might default on their debt. This has forced the European Central Bank to vow to buy government bonds to calm the market, Teerana said.